All India Federation of Tax Practitioners.Vs. Union of India.

AIR2007SC2990 This is an appeal filed by All India Federation of Tax Practitioners against the judgment of the Bombay High Court upholding the legislative competence of Parliament to levy service tax vide Finance Act, 1994 and Finance Act, 1998.According to the impugned judgment, service tax falls in Entry 97, List I of the Seventh Schedule to the Constitution. The question which arises for determination concerns the constitutional status of the levy of service tax and the legislative competence of Parliament to impose service tax under Article 246(1) read with Entry 97 of List I of the Seventh Schedule to the Constitution. The issue arising in this appeal questions the competence of Parliament to levy service tax on practising chartered accountants and architects having regard to Entry 60 List II of the Seventh Schedule to the Constitution and Article 276 of the Constitution. Relevant Provisions of the Constitution of India The relevant provisions of the Constitution of India are as follows: Article 246. Subject-matter of laws made by Parliament and by the Legislatures of States.- (1) Notwithstanding anything in Clauses (2) and (3), Parliament has exclusive power to make laws with respect to any of the matters enumerated in List I in the Seventh Schedule (in this Constitution referred to as the 'Union List'. Article 265. Taxes not to be imposed save by authority of law.-No tax shall be levied or collected except by authority of law. Article 268A. Service tax levied by Union and collected and appropriated by the Union and the States.- (1) Taxes on services shall be levied by the Government of India and such tax shall be collected and appropriated by the Government of India and the States in the manner provided in Clause (2). (2) The proceeds in any financial year of any such tax levied in accordance with the provisions of Clause (1) shall be(a) collected by the Government of India and the States; (b) appropriated by the Government of India and the States, in accordance with such principles of collection and appropriation as may be formulated by Parliament by law. Entry No. 92C of List I of the Seventh Schedule to the Constitution is as follows: 92C. Taxes on services. Entry 60 of List II of the Seventh Schedule to the Constitution is as follows:

60. Taxes on professions, trades, callings and employments. Contention of the Federation. The basic contention of the appellant is on Entry 60 of List II of the Seventh Schedule . The said Entry refers to taxes on professions, trades callings and employments. (1) every entry in the Lists in the Seventh Schedule represents a field of legislation. Therefore, it should be read in a broad sense. (2) That the State Legislature alone has an absolute jurisdiction and legislative competence to levy service tax. (3) that service tax was a tax on profession. (4) service tax fell within the ambit of Entry 60 of List II. The word profession in the said Entry was not limited by any restriction/qualification and, therefore, it must be read with the widest possible sense. (5) The word 'profession' has been defined in Black's Law dictionary to mean a vocation requiring advance education and training. The word 'profession' has been defined in the English dictionary by Collins to mean an 'occupation' requiring special training in the liberal arts or sciences, especially one of the three learned professions, law, theology, or medicine. (6) That there was no difference between tax on profession and tax on services.The word 'profession' in Entry 60 List II was synonymous with the word 'service' and, therefore, tax on profession would include tax on service, which tax could be levied only by the State Legislature as there cannot be a profession without service. Therefore service rendered by a chartered accountant/cost accountant to his client is the service rendered as a professional. (7) that the tax on profession was the State Entry and, therefore, Entry 97 of List I cannot be invoked and that Parliament had no legislative competence to levy service tax. Under the Finance Acts, taxability was limited to rendition of professional services and, therefore, tax on profession under Entry 60 of List II would include tax on service.

Contention of the Revenue(1)that 'service tax' was a tax on activities undertaken for consideration; that it was a tax on services and not on the service-provider; (2) that the tax on profession was essentially a tax on the professional and, therefore, Parliament had the legislative competence to levy service tax under Entry 97 of List I. Reasoning of the Court. (i) Meaning of 'Service Tax': Concept of service tax lies in economics. It is an economic concept. It has evolved on account of Service Industry becoming a major contributor to the GDP of an economy, particularly knowledge-based economy. With the enactment of Finance Act, 1994, the Central Government derived its authority from the residuary Entry 97 of the Union List for levying tax on services. The legal backup was further provided by the introduction of Article 268A in the Constitution which stated that taxes on services shall be charged by the Central Government and appropriated between the Union Government and the States. Simultaneously, a

new Entry 92C was also introduced in the Union List for the levy of service tax. As an economic concept, there is no distinction between the consumption of goods and consumption of services as both satisfy human needs. It is this economic concept based on the legal principle of equivalence which now stands incorporated in the Constitution. Further, it is important to note, that 'service tax' is a value added tax which in turn is a general tax which applies to all commercial activities involving production of goods and provision of services. Moreover, VAT is a consumption tax as it is borne by the client. Moti Laminates Pvt. Ltd. v. CCE 1995ECR1(SC) lays down 'principle of equivalence'. The principle was evolved in case of excisable goods. It states that The duty of excise being on production and manufacture which means bringing out a new commodity, it is implicit that such goods must be useable, moveable, saleable and marketable. The duty is on manufacture or production but the production or manufacture is carried on for taking such goods to the market for sale. The obvious rationale for levying excise duty linking it with production or manufacture is that the goods so produced must be a distinct commodity for purposes of buying and selling. Therefore, even if an item is manufactured or produced, it will not fall in the concept of goods till the test of marketability is satisfied. Therefore the duty of excise is on goods and not the manufacturer. Similarly service tax is levied on consumption of services and not on service providers. Applying the principle of equivalence, there is no difference between production or manufacture of saleable goods and production of marketable/saleable services in the form of an activity undertaken by the service provider for consideration, which correspondingly stands consumed by the service receiver. It is this principle of equivalence which is in-built into the concept of service tax, which has received legal support in the form of Finance Act, 1994. For example, an Event Manager (professional) undertakes an activity, namely, of organizing shows. He belongs to the profession of Event Manager. As long as he is in the business or calling or profession of an Event Manager, he is liable to pay the tax on profession, calling or trade under Entry 60 of List II. However, that tax under Entry 60 of List II will not cover his activity of organizing shows for consideration which provide entertainment to the connoisseurs. For each show he plans and creates based on his skill, experience and training. In each show he undertakes an activity which is commercial and which he places before his audience for its consumption. The tax on service is levied for each show. This situation is very similar to a situation where goods are manufacture or produced with the intention of being cleared for home consumption under the Central Excise Act, 1944. This is how the principle of equivalence equates consumption of goods with consumption of services as both satisfy the human needs. (ii) Object of enacting the Finance Act: Finance Act is passed every year to fix the rate of tax. This is the primary object for enacting the Finance Act. But it does not mean that a new distinct charge cannot be introduced by the Finance Act. For example, what is not 'income' under the Income Tax Act can be made income by the Finance Act.. Additional tax

revenue can be collected either by increasing the rate or by levy of a fresh charge. All levies through the medium of the Finance Act may either enhance the rate or levy a fresh charge. The Finance Act can also make an extensive modification in an Act. In The Madurai District Central Co-operative Bank Ltd. v. ITO [1975]101ITR24(SC) it was held that the IT Act, 1961 and the annual Finance Acts are enacted by Parliament in exercise of the power conferred by Article 246(1) read with Entry 82 of List I. It was further held that though it was unconventional for Parliament to amend the taxing statute by incorporating the amending provision in an Act of a different pith and substance, such course would not be unconstitutional. It was held that though the IT Act, 1961 was a permanent Act while Finance Acts are passed every year to prescribe the rates at which the tax has been charged under the IT Act, 1961 still it would not mean that a new and distinct charge cannot be introduced under the Finance Act. Therefore, what is not income under the IT Act, 1961 can be made 'income' by a Finance Act. Similarly an exemption granted by the IT Act can be withdrawn by the Finance Act. Similarly, subject to Constitutional limitations, additional tax revenue could be collected by enhancement of the rate of tax or by the levy of a fresh charge vide the Finance Act. Parliament, through the medium of Finance Act, may do what the amendment to the IT Act, 1961 by a separate Amendment Act, can do. It was further held that, the Finance Acts, though annual Acts, are not necessarily temporary Acts as they may contain provisions of a general character which are of permanent operation. Thus, Parliament is competent to introduce a charging provision in a Finance Act. This judgment was in the context of the IT Act, 1961. However, the ratio of that judgment would apply equally to the Finance Acts enacted annually for enhancement of the rate of excise duty by levy of a fresh charge under that Act. Therefore a new charge by way of service tax or tax on service levied statutorily by the Finance Act is valid. (iii) Interpretation of Taxing Entries in the Seventh Schedule to the Constitution: There are two groups of entries in each of the three Lists in the Seventh Schedule. In List I, Entries 1 to 81 refer to several matters over which Parliament has authority to legislate. But Entries 82 to 92 enumerates the taxes which could be imposed by a law of Parliament. An examination of these two groups of entries shows that while the main subject of legislation finds place in the first group, a tax in relation thereto is separately mentioned in the second group. For example, Entry 22 in List I refers to 'Railways' whereas Entry 89 refers to 'Terminal taxes on goods or passengers, carried by railway'. If Entry 22 is construed as involving taxes to be imposed, then Entry 89 would be superfluous. Similarly, Entry 41 of List I refers to 'Trade and commerce with foreign countries; import and export across customs frontiers', however, Entry 83 refers to 'Duties of customs including export duties'. If Entry 41 of List I, which refers to trade and commerce with foreign countries and which refers to import and export, is to be interpreted as including duties of customs under that Entry, then Entry 83 would be rendered superfluous. In List II, Entries 1 to 44 form one group mentioning the 'subjects' on which States could legislate. Entries 45 to 63 in that List form another group, and they deal in with taxes.For example, Entry 18 refers to

'Lands' whereas Entry 45 referred to 'Land Revenue'. If land revenue was to fall under Entry 18 then Entry 45 would be rendered superfluous. Therefore in constitutional scheme of legislative powers, taxation is not intended to be compromised in the main subject in which an extended construction can be given as that test cannot be applied to taxation. Taxing entries are distinct entries. In the present case Entry 60 of List II, mentions 'Taxes on professions, trades, callings and employments'. Entry 60 is a taxing entry. It is not a general entry. Therefore tax on professions etc. has to be read as a levy on professions, trades, callings etc., as such. Therefore, Entry 60 which refers to professions cannot be extended to include services. This is what is called as an Aspect Theory. If the argument of the appellants is accepted, then there would be no difference between interpretation of a general entry and interpretation of a taxing entry in List I and List II of the Seventh Schedule to the Constitution. Therefore, 'professions' will not include services under Entry 60. For these reasons, Parliament had absolute jurisdiction and legislative competence to levy tax on services. While interpreting the legislative heads under List II, we have to go by schematic interpretation of the three Lists in the Seventh Schedule to the Constitution and not by dictionary meaning of the words 'profession' or 'professional', otherwise the distinction between general entries and taxing entries under the three Lists would stand obliterated. (iv) Meaning of the words Taxes 'on' professions: Entry 60 List II refers to taxes on professions etc. It is the tax on the individual person/firm or company. It is the tax on the status. A professional like chartered accountant or a cost accountant obtains a licence or a privilege from the competent Body to practise. On that privilege as such the State is competent to levy a tax under Entry 60. However Entry 60 is not a general entry. It cannot be read to include every activity undertaken by a professional for consideration. Service tax is a tax on each activity undertaken by a professional where he renders professional based services on contract. The activity undertaken by a professional has two aspects. From the point of view of the professional , it is an activity undertaken by him based on his performance and skill. But from the point of view of his client, the professional is his service-provider. It is a tax on 'services'. The activity undertaken by the professional is similar to a saleable or marketable commodities produced by the assessee and cleared by the assessee for home consumption under the Central Excise Act. For each contract, tax is levied. Tax cannot be levied under service tax without service being provided whereas a professional tax under Entry 60 is a tax on his status. It is the tax on the status of a professional. As long as a person/firm remains in the profession, he/it has to

pay professional tax. That tax has nothing to do with the commercial activities which he undertakes for his client. This is the ambit and scope of Entry 60 List II which is a taxing entry. Though the widest possible interpretation should be given while interpreting legislative entries, but such interpretation is subject to distinction between between the general entry and the taxing entry. Keeping in mind the distinction between a general entry and taxing entry, it is clear that tax on service does not fall under Entry 60 List II. Therefore, Parliament has absolute jurisdiction and legislative competence to enact the law imposing tax on services under Entry 97 List I of the Seventh Schedule to the Constitution. Every Entry in the Lists has to be given a schematic interpretation. That is the reason why the Entries in the Lists have been divided into two Groups, one dealing with general subjects and other dealing with taxation. The entries dealing with taxation are distinct entries vis--vis the general entries. It is for this reason that the doctrine of pith and substance has an important role to play while deciding the scope of each of the entries in the three Lists in the Seventh Schedule to the Constitution. The bottom line of the said doctrine is to look at the legislation as a whole and if it has a substantial connection with the Entry, the matter may be taken to be legislation on the topic. Competence to legislate flows from Articles 245, 246 and the other Articles in Part XI. A legislation like Finance Act can be supported on the basis of a number of Entries. In the present case, we are concerned with the Constitutional status of the levy, namely, service tax. The nomenclature of a levy is not conclusive for deciding its true character and nature. For deciding the true character and nature of a particular levy, with reference to the legislative competence, the court has to look into the pith and substance of the legislation. The powers of Parliament and State Legislatures are subject to Constitutional limitations. Tax laws are governed by Part XII and Part XIII. Various entries in the Seventh Schedule show that the power to levy tax is treated as a distinct matter for the purpose of legislative competence. This is the underlying principle to differentiate between the two Groups of entries, namely, general entries and taxing entries. Therefore taxes on services is a different subject as compared to taxes on professions, trades, callings etc. Therefore, Entry 60 of List II and Entry 92C/97 of List I operate in different spheres. Conclusion: The Parliament has legislative competence to levy service tax under Entry 97 of List I . The above position now stands fortified by the Article 268A and Entry 92C which clearly indicates that Entry 60 of List II and Entry 92C of List I operate in different spheres. Accordingly, the appeal is dismissed.